Tuesday, January 19, 2010

Former Mafia Prosecutor Now Uses Data Mining to Catch Tax Cheats

Another crazy idea popped into Bill Comiskey’s head: What if the tax department required banks to turn over their customers’ mortgage applications? Homebuyers fill them out at a time when they want to impress the bank with their incomes. They sometimes are not in the same mood when they fill out their tax returns. Investigators could compare the two records, look for clues.

Comiskey, the state’s lead tax enforcer, called Nonie Manion, director of the audit division, from the car. He was zipping across New York state to deliver another speech at another tax preparers convention. “Would this work?” he asked.

Every piece of personal information is on the table these days at the tax department, where a desire to collect taxes on the underground economy is prompting new and aggressive tactics. Comiskey, a one-time Mafia prosecutor, has been armed by lawmakers with new powers. His staff is for the first time pulling information from third parties into a continuous river of information about businesses and individuals.

The tax department is brainstorming a kind of data mining most often associated with Homeland Security.

Is a bar underreporting its sales? Annual reports from liquor wholesalers would show it.

Is a pizza franchise selling more pies than it is reporting to the state? The chain’s parent company might have to show how many pizza boxes it sent to the local shop.

Is a car dealer low-balling its sales? Check the records over at the DMV.

The new approach makes New York a leader in the pursuit of tax cheats and has put tax professionals and businesses on alert that New York is no longer soft on fraud. Some tax professionals say the state is being unnecessarily antagonistic, particularly toward cash businesses that do not keep great records.

Comiskey makes no apologies.

It is his job to “close the tax gap” — the term for the billions of tax dollars individuals and businesses do not pay every year.

If one person does not pay taxes, another person has to pay more. Honest taxpayers get squeezed, and the state’s schools, roads and health care systems suffer.

Comiskey brings the experience of a forensic investigator. But as a newbie to the tax department, he also feels free to throw out ideas that seem naive or impossible to people who have been auditing tax returns for a long time.

Some of the tax-hunting methods seem like common sense to him. For a long time, auditors shied away from talking to taxpayers. They had the power of subpoena, but chose instead to work with records requests or interviews with the tax preparer.

Now, auditors more often just talk to taxpayers. And the state Legislature just made it a crime for taxpayers to lie to investigators.

The audit division set a record in Comiskey’s first year, producing $3 billion in revenue — $1 billion more than the year before.

Criminal tax fraud investigations increased from 581 in the ’06-’07 fiscal year to 2,078 in the ’08-’09 fiscal year. Nearly 600 cases were referred to prosecutors that year, about three times as many as the last year of the previous administration.

Comiskey’s methods are catching a lot of attention from other states and from taxpayers.

Other states are also improving their investigative resources, but New York is unique in winning state legislation that requires third parties to supply information routinely, said Verenda Smith, speaking for the Federation of Tax Administrators, in Washington, D.C. And Comiskey is eager to tell people about it. He delivered 42 speeches across the state in 2009.

“It’s not a game of gotcha,” Smith said. “Gotcha is the last thing you want to have to deal with and should be the tiniest part of your work. Most people will pay correctly and on time if they know what to do. Even more people will pay correctly and on time if they know you can catch them.”

It does feel like gotcha to some business owners, who are challenging the state in its tax tribunal.

The tribunal in December delivered a rare victory to the taxpayer when it questioned the state’s method of estimating taxes owed by a Buffalo restaurant that could not produce its own receipts.

Similar cases are brewing all over the state, said Tom Riley, tax partner at ParenteBeard LLC, in Syracuse. But fighting the state is expensive and mostly a losing proposition. More-frequent audits are frustrating small-business owners, who cannot afford to fight. There’s a happy medium someplace, he said, but this is not it.

“Not that long ago, they were all about customer service, and taxpayers were customers and the pendulum swung one way,” Riley said. “Now it’s swung so much the other way, it’s become very difficult.”

Riley said the attitude is coming directly from the top of state government at a time when the state needs to close budget gaps.

In fact, Gov. David Paterson’s office is expected to announce this week that he wants to rely even more on tax fraud enforcement to balance next year’s budget.

Former Gov. Eliot Spitzer brought Comiskey to the tax department from the attorney general’s office in 2007. The two worked together in the AG’s office, where Comiskey led the Medicaid Fraud unit.

Before that, Comiskey spent 10 years on New York’s Organized Crime Task Force and had also worked in the AG’s criminal prosecution’s bureau and for district attorneys in Rensselaer County and Manhattan.

At the Medicaid Fraud Unit, investigators installed hidden cameras in nursing homes and saw nurses moving call bells away from patients so the staff could watch movies and socialize.

He brings those same techniques to his current job.

When he talks to groups, he likes to play real tapes of tax preparers who got caught in stings.

In 2007, the tax department decided to test the unregulated world of tax professionals. The investigators wore wires and visited tax preparers around the state, pretending to be new customers. Sometimes, they took the books of real businesses they had already stung for hiding income. They would even send in the real business owner with a hidden tape recorder.

Comiskey has been investigating fraud his entire career, but he was surprised to find so many tax preparers who put themselves at risk by fixing the books for strangers in exchange for a few hundred dollars.

“What you need to do is redo the books,” one said on tape. “Rip out these pages and do them again.”

The tax department did 170 undercover visits in three years. About 30 percent engaged in some type of fraud, he said.

The tax department’s staffing reflects the state’s new commitment. The staff grew from 2,562 in 2006 to 3,060 today. It is hiring 111 new auditors. The biggest growth was in the special investigations unit, which grew from 34 people in 2006 to 142 today.

Mark Klein, a tax attorney for Hodgson Russ LLP, in Buffalo, said he’s never seen anything like the state’s crackdown in his 30 years in the business.

The undercover stings are turning friends on friends, clients on their accountants, he said.

“It is rocking their world. It really is,” he said.

Klein hates to say it, but for a long time, New York taxpayers had the perception that they could skim a little off the top.

“New York has made it clear that they’re going to crack down,” he said. “They’re very much focused on cash businesses, and it’s getting to be like Big Brother.”

Klein is advising his clients to keep good records.

He said the state is catching some porpoises while fishing for tuna.

He said the state tax department asked a Syracuse bar for every sales receipt for every drink for the past three years. Of course, the bar doesn’t keep track of every drink sold, he said.

When there are no good records, the law allows the state to use outside information to estimate. The burden is then on the taxpayer to prove the state wrong.

In this case, Klein said, the state calculated a sales based on the cost of the bar’s rent. The bar is stuck.

“In that way, they’re catching a lot of honest tax people and making it appear as though they have a liability, when they don’t,” Klein said.

The State of New York Tax Appeals Tribunal recently shot down the state’s method of estimating sales volume at a restaurant called Mother’s, in downtown Buffalo.

The tribunal said the tax department used industry records in a way they were not intended to estimate taxes for the restaurant, which could not produce sales receipts.

“It must be pointed out that a lack of records does not equate to a presumption that taxable sales have been underreported,” the opinion said.

The tax department said that case was fact-specific and does not prevent the legally permissible use of third-party sources.

Comiskey said the fact that so many cases are upheld by the tribunal means that they are doing a good job of making reasonable estimates.

The department is just getting started on its new project to collect clues from third parties.

Comiskey wants to pour every available piece of information about a business into a computer database, where it can be quickly sorted, matched and analyzed.

The information will come from both private industry and state agencies. Surprisingly enough, the volumes of personal information collected by other government agencies — such as the Department of Motor Vehicles, the Health Department and the Department of State — are not already systematically collected and analyzed by tax auditors.

That is, in part, because the information has not always been kept in computer form, and, in part, because no one asked for it.

For at least 15 years, state law has required cigarette wholesalers to report the volume of sales to retailers. The information came on paper and sat mostly untouched in boxes.

Manion said businesses generally respond to these requests for information. But some businesses and even some other government agencies say they do not have enough information technology staff to comply.

The tax department is also working to routinely grab records of transactions from credit card companies. A 2009 bill did not make it through the state Legislature because banks convinced the tax department that their request would require extensive computer programming and that there could be problems with the data. It could be January 2012 before they start getting the information.

On the Big Brother issue, Comiskey and Manion said it’s true that privacy is sacrificed in administering tax laws. But, they point out, the government already knows about individuals’ medical problems, their earnings, their mortgage payments and their retirement contributions.

“It’s certainly not Big Brother when we’re asking businesses to provide us with what is essentially business information to help us administer tax laws fairly,” Comiskey said.

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